As Russia’s Isolation Grows, Oil Companies Caught in Middle

Nicholas Cunningham: The confrontation between Russia and the West took a turn for the worse with the downing of a Malaysian airliner on July 17, and that could spell trouble for several major oil companies operating in Russia.

The sanctions tightened the economic noose on the Russian economy by targeting companies in Russia’s energy sector. Up until now, western sanctions largely targeted individuals in the Russian elite, freezing their assets or issuing bans on American companies from doing business with them. But with oil and gas accounting for over 50 percent of revenues for the Russian state, if Obama wanted sanctions to have any bite, he had to escalate the campaign by going after Russia’s energy sector.

Until the July 16 announcement, the major western oil companies operating in Russia shrugged off their effects. Companies like BP, ExxonMobil, and Royal Dutch Shell defied White House pressure to avoid doing business with Russia.

They made a big bet on the likelihood that their billion-dollar projects would not be affected by the deteriorating relationship between Russia and the West.

But the markets took the latest round of sanctions much more seriously than their previous iterations. Rosneft saw its share price decline by 6.2 percent the day of the announcement, and Novatek was off 11.5 percent.

And western companies were not safe either. BP lost $4.4 billion in its market value on July 17. BP owns a 19.8 percent share of Rosneft, Russia’s state-owned oil company that was singled out by Obama’s sanctions. Nearly one-third of BP’s global oil production – or 1 million barrels per day – comes from its investment in Rosneft.

ExxonMobil also has massive business plans with Rosneft. The two companies are drilling a $300 million well in Siberia, and next month they plan on drilling a $700 million well in the Russian Arctic, the country’s most expensive in history. ExxonMobil and Rosneft have also agreed to jointly develop an LNG export terminal on Russia’s Pacific coast.